Hyderabad: Pharmaceutical firm Suven Life Sciences Ltd is scouting for a foreign partner to take its molecule SUVN-502 into human trials, having completed animal studies on the experimental drug to treat schizophrenia and Alzheimer’s disease.
The Hyderabad-based company needs to out-licence the molecule to establish “proof of concept”—evidence that it will work on humans—in the so-called phase II(a), or initial stage of phase II, of drug discovery that need to be conducted on at least 400 patients.
Potential partners are risk averse, said Suven’s chairman and chief executive officer (CEO) Venkat Jasti; they would rather take up molecules that have already had their proof of concept established.
“At least three big (potential) strategic partners have done due diligence, but it’s an uncertain field,” said Jasti. “We can’t bank on them completely.”
Failure to find a partner may mean that Suven will have to fund the trials with borrowed money, but Jasti concedes that convincing the board may be difficult. Jasti, 60, estimates the phase II(a) trials will cost as much as $25 million (Rs113.25 crore)—too large and risky an investment for a company the size of Suven, with a current market capitalization of Rs234 crore and revenue of Rs129.31 crore in the fiscal year ended 31 March 2010.
Big bill: Chief executive and chairman Venkat Jasti says phase II(a) trials will cost as much as $25 million, which is a risky investment for a company the size of Suven. Bharath Sai/Mint
Analysts say Suven is in a bind.
“They are trying to get an out-licensing partner for this molecule, but without proof of concept no one is going to come forward,” said Surajit Pal, a pharma analyst at Mumbai-based Elara Capital (India) Pvt. Ltd.
“The company is trying to access around $25 million to go beyond proof of concept trials. Only private equity investors can take that kind of risk, but NCE (new chemical entity) is a risky proposition as there is no guarantee.”
Suven’s struggle is illustrative of the kind of difficulties a small pharmaceutical firm faces in pursuing drug research and discovery.
“Indian companies still have a long way to go in drug discovery. They still have to learn how to monetize various stages of clinical trials and how to protect their intellectual property (IP) rights.” said Hitesh Sharma, a partner at consultancy Ernst and Young. “In the context of investors, it’s difficult to value companies with IP, and investors haven’t seen too much of success.”
SUVN-502 was found to be safe in toxic studies conducted on animals, the company said on 18 May. That paves the way for Suven to go ahead and file an investigational drug application (IND) with the US Food and Drug Administration (FDA); IND approval by the FDA is a prerequisite for a drug to be tested on humans.
“We have to fund through internal accruals or loans from financial institutions or look for a strategic partner,” said Jasti.
With Suven’s debt-equity ratio at 0.4:1, Jasti said the company can borrow Rs100 crore. If he doesn’t get the board’s go-ahead, Jasti may have to dilute his stake of 63.28%, he said. Jasti sold a 15% stake in 2001 to Borregaard Industries Ltd of Norway.
Established in 1989, Suven sold shares to the public in 1995. The company’s main breadearner is contract research and manufacturing services (CRAMS), which contribute 85% of revenue. The last two years haven’t been particularly good for CRAMS, with Big Pharma cutting down on research and development expenditure after the financial crisis.
“There is nothing much happening in the company on CRAMS side,” said Pal of Elara Capital.
Drug discovery and development services are another source of revenue. The company struck a deal with US drug maker Eli Lilly and Co. Ltd to co-develop a drug molecule for a central nervous system (CNS) disorder, but it hasn’t made much headway.
‘Make or break’
The company spends one-fourth of revenue on drug discovery. Suven has a pipeline of 13 new drug candidates in pre-clinical stages, mainly in the CNS area.
“We are a self-funded drug discovery company; we spend what we earn,” said Jasti. “Even though people (investors) are not happy about our bottom line growth, at least we haven’t borrowed.”
“Now there might be a little hiccup,” he pauses. “Now you say you want to borrow. The payoff is going to be huge if it clicks, but where is the guarantee for the chance you are taking? After putting in years of time and effort and (if we) don’t take a risk at this critical point, then what is the use? So it’s a make or a break situation.”
Jasti started the company as a bulk drug, or active pharmaceutical ingredient (as it known today), manufacturer—like most other Hyderabad-based pharma companies in the late 1980s. But Jasti shifted his focus in 1993, when he decided to make Suven a research and development-focused company. Prior to setting up the company 1989, Jasti used to own six pharmacies in New Jersey in the US.
The potential payoff is huge. According to the Alzheimer’s Association Report for 2011, the total cost of healthcare, including long-term care, and the loss of human productivity stemming from the disease is expected to increase from $183 billion in 2011 to $1.1 trillion in 2050.
“Overall, it’s a $25-30 billion opportunity if we can get 5-10% market share,” said Jasti.
To be sure, there’s competition. Pfizer Inc. of the US, H Lundbeck A/S of Denmark and GlaxoSmithKline Plc have their own drug molecules at different trial stages. Pfizer’s Aricept is the only known drug to treat Alzheimer’s and has a market size of $4 billion, Jasti said.
If all goes well and Jasti is able to rustle up the funding, he wants to start phase II(a) of trials by the end of the fiscal. It will take at least 18 months to get through the proof of concept stage.
“Getting an out-licensing partner isn’t going to be difficult once the proof of concept is established,” Jasti said. “If everything goes well, we can earn up to Rs1,500-2,000 crore through upfront and milestone payments.”
Jasti plans to take two more molecules into phase I clinical trials—one to treat schizophrenia and another to treat depression. The company can fund the first phase through internal accruals.
He is optimistic about his core business, which he expects to register a revenue growth of 15-20% in the current financial year.
“CRAMS market is showing signs of revival. Given our expertise in CNS segment, we expect a turnaround,” he said. “Years 2011 and 2012 are critical years for Suven Life Sciences.”